Tax Reliefs : The Government's Review
Author:
Gerald Murphy
At present, the Department of Finance is conducting a review of various exemptions and tax reliefs. Reliefs and exemptions represent of course one of the few ways that Government can influence economic and social aims through the tax system.
It was therefore somewhat surprising to see a headline on the front page of The Irish Times ( April 29 2005) announcing: “Cowen to defend stud farm tax exemption in Brussels”, reporting that the Minister was to travel to Brussels to speak to the Agricultural Commissioner (and NOT the one with responsibility for taxes) and to explain to Mariann Fischer Boel that our tax exemption does not infringe the EU treaty.
At the time of writing, the results of the meeting are not known and some issues raised below may have been dealt with or at least the options have become better defined. The question of the validity of the stud tax exemption is not the main focus here - it was referred to in an article in Accountancy Ireland last October.
SOCIAL, ECONOMIC BENEFITS?
It is however useful to reconsider the Minister's announcement (1 Dec 2004) that the Department of Finance and the Office of the Revenue Commissioners will undertake a detailed review of certain tax incentive schemes and tax exemptions in 2005:
“My aim”, the Minister said, “is to seek to improve the equity of the tax system taking into account the social and economic benefit of reliefs in delivering investment in housing, enterprise, urban and rural renewal, tourism, films and health facilities. Because of the complex nature of this issue, the interaction of such reliefs with economic activity and the unintended consequences that untimely action may have for investment, I want to ensure that I take the time necessary to strike a careful and considered balance … between the benefit to the investor and the good of the community…
“My preference is for a complete and comprehensive reform of the system rather than a piecemeal approach. I have directed my Department, together with the Revenue Commissioners, to undertake a thorough evaluation of the effect of all relevant incentive reliefs and exemptions and to bring forward proposals which would achieve the balance I have referred to … I want to make sure that everyone makes an appropriate contribution to the State.”
The review was also to incorporate an examination of data due to be available in late 2005 in relation to certain exempt income i.e. woodlands, stallions and greyhounds as well as data already available on other exemptions e.g. for artists.
So then, has the data on stud exemptions now come to hand? And may it be premature for the Minister to be prepared to defend just one exemption at this stage [ a piecemeal approach?] or does he have other economically and socially beneficial schemes in mind.
A complete Government study of the current economic benefits still seems to be awaited while the details reported on 2004 returns will hardly be representative of a year on year approach. So why defend stud farms at EU level and why so urgently at this time?
OTHER RELIEFS AND EXEMPTIONS
A more leisurely approach appears to be taken to reliefs where the EU may not be so interested. However, the defensive approach signalled for stud exemptions in April was not an objective apparently at the time of the Budget; on the contrary.
“The review will include a public consultation process seeking submissions on measures that could be introduced to limit the extent to which reliefs and exemptions can be used by high-earners to reduce or eliminate their tax bill.
For the purposes of this review and the public consultation process, those interested in making submissions may wish to consider the possibility of a ceiling on all reliefs or limits on the use of reliefs against all income including rental income or other horizontal measures, for example, the introduction of a minimum income tax for high earners or the restriction of reliefs so that no more than a specified percentage of income can be excluded from tax by means of certain tax reliefs.”
In short, there seemed to be a clear intention to implement restrictions.
In its response, CCAB-I questioned whether it was appropriate to add to existing restrictions since data was not available in most cases to make a reasoned judgment as to the impact of present restrictions let alone any additional measures. The data has to examine two aspects:
-The effect on the economy locally and nationally,
-The effect on the tax take so far as investors are concerned.
It is not certain whether the review would look at reliefs and exemptions individually or take a broad approach. It looks as if it may be piecemeal.
MEASURING RELIEFS
In relation to restricting reliefs, Governments own sources and studies suggested that the real value and benefit to the community of some schemes still has to be measured.
Nothing published to date by Government indicates that comprehensive data on any one sector or class of investment is yet available.
These studies do make the point anecdotally that the removal of tax reliefs may lead to a loss of economic activity that otherwise would continue to proceed.
“Thus”, says one study, “while eliminating a particular relief would lead to direct revenue gains, it also could indirectly lead to revenue losses stemming from reduced revenue from investments, employment, VAT receipts, etc. and this could serve to partially or wholly offset the direct revenue gains from eliminating the particular relief.”
Can this point solely to the bloodstock industry; are there other areas of tax encouraged industry that could equally be so defended.
CCAB-I, in its submission to Government, also refuted suggestions by the Department of Finance that many investment decisions were in effect driven by the tax relief. It argued that this is far from the case and that the majority of accountants look at the value of investment opportunities from the level of return expected, the risk associated with achieving that return, and lastly whether there is a tax advantage to add to the other benefits. Interestingly, Government studies to date argue that certain investment schemes need to continue to be made attractive and unrestricted if their benefit to the community is to be realised. For example, the studies themselves note that in the case of hotels, ring-fencing of capital allowances in the case of passive individual investors was not applied certain hotels in counties to the north west of the State.
As a final comment on the value to the community of tax relief schemes, it is surely worth pointing out the evident success of the Custom House Docks Area Scheme as well as the increased attractiveness of our towns and cities as places in which to live, all of which resulted from schemes which combined commercial viability with tax relief.
QUID PRO QUO
Present restrictions on reliefs include so-called base broadening measures as detailed in Government studies many of which are concerned with direct taxes. But of course there have been other base broadening measures and it is noticeable that apart from the so-called “stealth taxes”, other taxes have shown a considerable increase including of course stamp duties. The implication is that in order to meet the costs of tax reliefs for a certain sector of society (that is those with capital to invest), other sectors of society have had their burden increased through the base broadening measures. CCAB-I argued, therefore, that if further restrictions on tax reliefs are to be introduced or such restrictions are to continue that there should be a quid pro quo by which the base broadening measures are similarly relieved. Apart from this the level of the cap applied to certain reliefs should be raised
MINIMUM TAX RATE
The latest 2004 survey of high taxpayers has recently been published. With little time for detailed examination, it may be noted that:
-The 2004 study is the third undertaken by the Revenue Commissioners;
-It shows that between 1999/2000 and 2001 there was an increase in the effective tax rates paid by the top 400 earners despite a four point drop in the standard and high tax rates in that period.
-The report itself concludes that “capping capital allowances available to passive investors continued to take hold.”
Government's own findings suggest therefore that no immediate restrictions are necessary. The specific findings published to date in relation the minimum tax rate are also interesting;
-Doubts are raised as to its effectiveness in the light of of US experience in the same field;
-implementation would require complex legislation;
-it is not clear how losses or normal business expenses should properly be treated.
-it could be seen as sanctioning a lower tax rate for the rich.
-it would encourage tax planning for the target rate.”
Government's comments in considering a minimum tax rate refer to levels between 10% and 20%, though focusing on a rate of 20%. The difficulty with this rate is that theoretically it already exists. If a high net worth individual were to place all his or her money and assets into UCITS either domestically or within the EU, he or she could obtain an effective 20% rate of tax on income.
CCAB-I argued that if such an individual is to be encouraged to switch the assets to projects which are regarded as economically desirable and of benefit to the community, then there must be a clear incentive to reduce the tax on the investment return possibly towards a minimum rate of say 10%, which might have little validity economically or politically. This together with Government's own reports as highlighted above implies that a minimum tax rate is simply unworkable and probably detrimental.
Gerald Murphy is Taxation Executive with the Institute of Chartered Accountants in Ireland.